Environmentally Responsible Investing

Whether you're saving for retirement or growing your nest egg, you want to invest your hard-earned money in companies that respect the environment. Socially responsible investing (SRI) has been around for a while. It's a strategy that takes investors' ethics and values into consideration, with the two-pronged goal of getting a good financial return and supporting companies that do some good in the world.

SRI focuses on companies that work in an environmentally responsible way, respect human rights and indigenous peoples, and deal fairly with employees and consumers. Some—but not all—SRI funds also avoid companies involved in controversial industries like tobacco, alcohol, weapons, and gambling. So if you object to certain kinds of businesses, be sure to research the SRI funds you're considering to make sure you're not investing in something you oppose.

There are several ways you can invest responsibly:

• Mutual funds. Socially responsible mutual funds are made up of securities from companies that act in accordance with certain ethical, moral, or religious values. Green mutual funds hold stock in businesses that protect the environment and/or in forward-looking companies that are working on solutions to environmental problems, such as clean energy. To start your research into green and socially responsible mutual funds, spend some time on the Social Investment Forum (www.socialinvest.org), a nonprofit association of financial services professionals and companies. Another helpful site is SocialFunds (www.socialfunds.com), which has thousands of pages on mutual funds, community investing, sustainability reports on specific companies, news, and more.

  Tip

  Investopedia, a Forbes website, has an entire section with articles, opinions, and tips on green investing. Visit it at http://tinyurl.com/mflm9w.

• Individual stocks. Many green-minded investors prefer to screen and select their investments individually, rather than going with a mutual fund. When you do your own research (instead of relying on someone else to pick stocks for you), you know you're choosing companies that are in line with your values and get a sense of satisfaction from making your own investment decisions. In addition, you'll pay less in fees and you may even get a higher return, because many mutual funds fail to outperform the major market indexes. (Of course, as the box on Environmentally Responsible Investing explains, there's a potential for greater losses, as well.)

  Up To Speed: Stocks vs. Mutual Funds

  New investors are often bewildered by all the options out there. A common source of confusion is the difference between stocks and mutual funds.

  First, you need to know what a stock is: To raise money, companies sell shares of stock, which are little pieces of the company. In other words, you're giving the company money to help run its operations. If a business sells 10,000 shares to investors and you buy 100, for example, you're the proud owner of 1% of that company. Most investors buy shares hoping that the company will do well and the stocks will go up in value. You can buy individual stocks, selecting a company and purchasing a specific number of shares. A collection of stocks is called a portfolio.

  To buy shares in a company, you need a stockbroker to help you. The broker can be someone who works for a financial firm, or you can manage your portfolio using an online stockbroker like E*Trade (www.etrade.com) or TD Ameritrade (www.tdameritrade.com).

  When you invest in a mutual fund, you're pooling your money with other investors so that the fund manager can invest that money in a portfolio of stocks and other securities (like bonds and money-market funds). The fund manager picks the stocks and balances the portfolio.

  Which is better? The answer depends on how much time and money you're willing to devote to your investments. Choosing individual stocks and managing your own portfolio takes time and skill: You have to research companies and be able to analyze them and their potential for growth. You also need to watch the stocks in your portfolio so you can step in and manage them. Buying individual stocks can be expensive, too. When you pool your money with thousands of other investors in a mutual fund, on the other hand, the starting threshold is lower—often just a few hundred dollars.

  Individual stocks can have greater gains—and greater losses. A mutual fund includes numerous stocks and other kinds of securities. The idea behind this diversity is to provide some stability. If one stock shoots up, other stocks in the fund that aren't performing quite so well mitigate that rise, so the fund's value doesn't increase as much as the individual stock's does. But this works both ways: When a stock drops in price, the other securities in the fund help to cushion that fall.

• Community investing. If you want to be sure your investment is helping communities, consider investing in a community development financial institution (CDFI), which loans money to people and organizations that have don't have access to traditional loans. This money can be used to start or grow a small business, buy or improve housing, get an education, and so on. Many CDFIs provide micro-loans, small amounts of money to help individual entrepreneurs who don't qualify for other loans. Two CDFIs to check out are Self-Help (www.self-help.org) and Clearing House CDFI (www.clearinghousecdfi.com).

Tip

Kiva is a website that matches investors with specific projects by partnering with microlending institutions around the world. Here's how it works: When you visit www.kiva.org, click the Lend button to browse entrepreneurs from around the world who need funds. (You can also search by the requestor's gender, type of loan, or region.) For each loan request, you can read about the amount needed, what the borrower will use it for, and the loan partner's default and delinquency rates. When you find a project you want to invest in, you choose the amount (which can be as little as $25) and pay using PayPal or a credit card. Over time,the borrower repays the loan, and you can keep those funds or invest them in another project.

Investing in the stock market can be a roller-coaster ride, and green businesses are just as subject to its ups and downs as any other company. Never invest money you can't afford to lose. And before you buy a stock or fund, do your research. Check how a stock or fund has performed over time (not just last quarter or last year) and compare it to other funds and stock market indexes such as the Dow Jones and NASDAQ. A great resource for researching stocks and mutual funds is Morningstar (www.morningstar.com), which offers analysis and evaluation of stocks and funds, including their risk levels. Or check out MSN's Money Central: http://moneycentral.msn.com/investor/home.aspx. And to see how a particular company measures up in terms of climate change, take a look at Climate Counts (http://climatecounts.org), which rates companies' commitment to fighting global warming.

Note

When evaluating companies, watch out for greenwashing—that's when businesses try to make their practices look greener than they actually are. Some companies run misleading ad campaigns, for example, in hopes of getting good PR they don't deserve. Other greenwashing practices include making false claims, such as saying that a product is organic when it hasn't been certified as such, and exaggerating green initiatives. Some companies spend millions more on ads to prove how green they are than on actually cleaning up their act. If you're wondering whether a particular company is a greenwasher, check Greenpeace's Greenwashing site (http://stopgreenwash.org) or the Greenwashing Index (www.greenwashingindex.com).